Forex Exchange Morning Report

New Zealand Dollar: NZD posts fresh highs (again)

The NZD continued to grind higher during yesterday's local session peaking at a fresh high of 0.7759 with no data to give it any real direction. From the opening of the offshore session the NZD began to find some real momentum as it surged through 0.7800 on its way up to another 25 year high of 0.7835. With the market currently pricing in a 34% chance of another interest rate hike when the RBNZ meet on 26 July, investors have signalled that this risk is still providing enough incentive to continue to chase NZ's high yields.

Australian Dollar: AUD continues to drive higher

The AUD strengthened early in yesterday's local session with market participants closing out of short AUD/USD positions. During the overnight session the currency continued to drive higher as negative sentiment out of the US remained and investors seemed happy to further jump on board the carry trade. Although the RBA is not expected to raise interest rates on Wednesday, the market is currently pricing more than a 100% chance of another hike by year end. With Australian sentiment still relatively strong, market participants may consider dips in the currency as an opportunity to continue buying AUD.

Major Currencies: USD continues to fall over mortgage concerns.

The USD continued to sell off overnight against all currencies on lingering concerns that problems in the sub prime mortgage market would spill over into the rest of the economy. Concerns were also raised that rating agencies were masking losses in the market by not cutting credit ratings; the highest default ratings on home loans in a decade have reduced the prices of some bonds by 50%. The fall in the USD was particularly notable against the Sterling which rallied to a 26-year high, while the euro also rose to within half a cent of its record high against the USD. Elsewhere, the USD ignored June ISM data which showed the manufacturing index rose to 56.0 from 55.0 the previous month, slightly higher than forecast.

Overnight News

Japanese earnings data decelerated in May. Ordinary earnings fell 0.6%yr in May, against a revised pace of –0.2%yr in April. Overtime earnings grew 1.1%yr, down from 1.5% in the prior month.

Japanese Q2 Tankan was moderately better than expected. Large manufacturers' business conditions were unchanged at +23. The large nonmanuf headline was also stable at +22. Small firms saw conditions deteriorate slightly, while medium sized non-manufacturers saw conditions improve. Labour shortages remain broadly evident. Our Tankan based output gap remains positive, but resource pressures were reduced slightly in the quarter. Capex spending plans for FY07 were revised up across the board. The sales and profit projections may portray an impending accommodation of wage increases.

US June ISM manufacturing rose from 55 to 56, the highest level since April last year. New orders and production were both up, while employment dipped slightly.

Euroland June PMI manufacturing was revised up to 55.6 from 55.4, which had already beaten expectations. However, both France and Italy reported declines, with Germany responsible for the overall increase.

UK June house prices (Nationwide) rose a higher than expected 11.1% yr, up from 10.3% in May. This is the highest rate since January 2005, but house price growth is expected to slow later this year.

UK June PMI manufacturing fell to 54.3 from 54.7. Export orders improved but overall new orders fell.

Events Today
Date Country Release Last Forecast
3 Jul Aus May Dwelling Approvals 8.1% 0.5%
May Retail Sales 0.1% 0.6%
US May Pending Home Sales –3.2% 2.0%
May Factory Orders 0.3% –0.8%
Jun Auto Sales, mn 16.2 16.3
Eur May PPI %yr 2.4% 2.6%
May Unemployment % 7.1% 7.1%
UK Jun PMI Construction 58.0 58.5
Jun Nationwide Consumer Confid 99 95
4 Jul NZ Q2 Employment Confid Index 131.0 n/f